Central Garden & Pet Company (CENTA) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Pet's Second Quarter 2012 Financial Results Conference Call. My name is Amy, and I will be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Steve Zenker, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, Amy. Good afternoon, everyone. Thank you for joining us. It's my pleasure to welcome you to today's call and to introduce our other speakers. With me on the call today are Bill Brown, Central's Chairman and Chief Executive Officer; Gus Halas, President and Chief Executive Officer of the Central Operating Companies; and Lori Varlas, Central's Chief Financial Officer. As a reminder, we issued a press release this afternoon providing results for our fiscal second quarter ended March 24, 2012. The press release is available on our website at www.central.com. Before I turn the call over to Bill, I would like to remind you of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The statements made during this conference call, which are not historical facts, are forward-looking statements. Central undertakes no obligation to publicly update forward-looking statements to reflect new information, subsequent events or otherwise. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. These risks are described in the company's Form 10-K for the fiscal year ended September 24, 2011, filed on November 21, 2011, and other Securities and Exchange Commission filings. Now I will turn the call over to Bill Brown. Bill?

Thanks, Steve. Welcome, and good afternoon. As we have discussed on our last 2 earning calls, we're on a path to drive long-term shareholder returns by transforming our company from a portfolio of businesses to an integrated multi-brand company. This is a multi-year initiative to transform all aspects of our organization from sales and marketing to supply chain and shared services. We're committed to increase investments and innovation and brand building, with changes in our operations to better support our customers and drive efficiencies across the business and increase profitability. We're positioning Central for the future. During the second quarter, we experienced strong early demand from consumers for many of our products. However, we encountered issues meeting demand as our transformational activities resulted in some near-term disruptions to our business. Our teams have been working hard to resolve these issues and meet demand for our products. April sales were up significantly, benefiting from shipments of backlog products that we did not ship in the March quarter, as well as strong demand for our flea and tick products. I'm confident that we will execute our transformation, while keeping our eye on the ball and delivering for our customers. We are still on track to meet the metrics that we laid out on our previous calls. We've made good progress against our transformational goals, and we are continuing to invest to make many of the necessary changes a reality over the course of the next 2 to 3 years. As we shared with you on previous calls, we expect the second half of 2012 to be better than the first half. We continue to expect the second half of the year to show improvement. We remain patient in brand building. We're in it for the long haul with an eye on sustainable top line growth and improved profitability. And now I'll turn it over to Gus, who will update you on our progress towards those objectives and provide some color on our second quarter results. Gus?

Thanks, Bill. As we mentioned previously, we expected the first 2 quarters of our fiscal year to be challenging. This was indeed the case in our second quarter. However, from a transformational perspective, we continue to make good progress in addressing the operational complexity and inefficiencies that have hampered the company's performance under our previous portfolio-based model. As we have communicated, the organizational realignment has been completed, our new structure is in place and we're executing against our roadmap for change across the entire organization. It's been my experience, the challenges always arise with any transformation during the transition to a more sustainable and repeatable model. They become most evident when the system is stressed. You prepare for those situations, you can anticipate and react swiftly and deliberately to unexpected issues. As we move towards standardized processes, the challenges we face in these areas should diminish considerably. In our second quarter, strong early demand for some of our products occurred at the same time we were consolidating some of our plants and distribution facilities. This, along with other supply issues, resulted in execution glitches that delayed fulfilling orders for some customers. I am confident that the operational issues we encountered are temporary in nature, and we're addressing them as fast as possible. Some of the delayed products from the second quarter shift in April, increasing our sales substantially compared to the prior year. Additionally, a good deal of our flea and tick topical product for dogs and cats, which we talked about on our last call, shipped in April. These products are selling extremely well in the retail channels. The strength in these products has been driven by our innovative applicator and by additional business at some of our largest customers. We are putting marketing dollars behind these products, communicate to the consumer the fast action of the active ingredients and benefits of a new applicator. So fulfillment of the delayed second quarter orders, together with the strength of the flea and tick and general purpose insecticides, resulted in a substantial sales increase in April. Aside from these issues I described, the transformation is progressing as planned. Let me give you some updates on the objectives we outlined in our year end November conference call. Since the beginning of our fiscal year through today, we have closed one manufacturing facility and 5 warehouses. This meets the 6-facility reduction target we disclosed in November. In addition to the closures, we also downsized another distribution facility. Adding fewer facilities will allow us to be more efficient in meeting our customers' needs and reduces our cost and investment in working capital. Also at 2 of our warehouses, we're shipping both Garden and Pet Products, further enhancing our effectiveness as one centralized company. We anticipate closing additional 2 to 3 facilities in the second half of fiscal 2012, as well as driving additional efficiencies in our existing plants and distribution centers. We started the year with 11 ERP systems and are now down to 9. We expect to reduce the number to just 2 by December of 2013. Fewer ERP systems will enable the organization to operate more seamlessly and allow greater standardization of data and reporting. We have reduced our total SKU count by approximately 7% since the beginning of the year, eliminating many SKUs with marginal profitability. As a reminder, our goal is to reduce SKUs by 30% to 35% in the next 2 to 3 years. We still have a lot of opportunity in this area and are aggressively pursuing this and other initiatives to simplify our business. Our goal is to reduce our inventory balance by $60 million to $70 million after taking into accounting the sales growth by the end of the fiscal year. We continue to target double that number over the next 2 to 3 years. By the end of our third fiscal quarter, we expect to see inventory start to come down appreciably as we exit our busy target season. We previously talked about our target of reducing our cost by $30 million as we exit calendar 2012, taking into account action to date in procurement, savings from combining facilities and headcount reductions. We have achieved our underway on about $15 million in savings or halfway to our goal. Please keep in mind, I'm referring to run rate reduction, meaning those annual savings are expected to be fully realized beginning of next year. We are still confident we can take $120 million of cost out of the company in the next 2 to 3 years. We believe supply-chain efficiency and savings will account of about 75% of the savings, including manufacturing and procurement opportunities, transportation optimization and warehouse consolidations. The remaining balance of the expected savings should come from sales, operations and general administration. In keeping with this goal, we recently announced that we are opening a U.S.-based shared service center in Boise, Idaho. We will co-locate our transactional processing activities there, a model which lends itself to more nimble execution and efficiency. And importantly, more importantly, consistent support model for our customers. We have begun hiring into the shared service center this quarter with a methodical rollout planned over the next 18 to 24 months. So in summary, we remain on track to meet our transformation targets first communicated to you in November. We also continue to target sustainable top line growth of 10% or more and EBIT margins of at least 10% after we complete the transformation. Admittedly, we have much work ahead of us, but we are keenly focused on growing our business, increasing profitable growth and meeting our customer needs. With that, I'll turn it over to Lori. Lori?

Thanks, Gus. The details on our second quarter results are in the press release that we issued this afternoon, but let me focus on a few items. Our sales for the quarter declined, with decreases in both Garden and Pet segments compared to the second quarter of last year. The weakness was in part due to the challenges the company faced in getting products out to retailers. This was especially true for our Garden business, where warm winter and early spring generate strong retail sales for some of our products. Early consumer demand caused retailer orders to be well above prior year levels, and this combined with our supply chain challenges create a shipping backlog with some of our products. Sales of the wild bird feed products declined, reflecting our decision to discontinue certain unprofitable products and in the face of what we believe is category weakness. Our consolidated gross margin for the quarter declined 200 basis points to 31.6% from 33.6% in the second quarter of 2012. This was due primarily to operational disruption related to warehouse consolidation activity and other supply issues, which impacted our product mix. Other gross margin decreased in both segments, the decrease was more pronounced in our Garden segment. So let me give you some details on our segment results. In the Garden Product segment, sales declined 6% versus last year with the decline most pronounced in wild bird feed and grass seed. In addition, our higher margin control business was impacted by the delays previously mentioned. Sales of other manufacturers' products were up 13% in response to the extended listings for some of the organic products we distribute. Margins for the Garden Product segment declined, impacted significantly by mix, including lower sales of higher-margin control products and grass seed than a year ago. Margins on wild bird feed in the Garden segment were close to last year's level as price increases taken over the last 12 months have offset a good deal of the increase in the cost of grains. Let's turn to our Pet segment. In the Pet Product segment, sales were relatively flat with a decline of 1%, due in large part to lower wild bird feed sales. We made a conscious decision this year to discontinue some wild bird feed business as we believe the return was too low. Our Product business continued its trend of healthy growth. The operational issues we've mentioned affected shipment of certain Pet Products, primarily in our Dog & Cat business. We're working through those issues and shipments increased in April, including those deferred from our March quarter. Margins in our Pet Product segment experienced a slight decline due primarily to a drop in margins in our Dog & Cat business, which were affected by our transformational efforts. SG&A expenses as a percentage of sales increased slightly to 22% from 21.3% in Q2 2011 due to lower sales. We are continuing to put marketing support behind our product and to build our master brand. Our net income was $22 million versus $32 million and our second quarter EPS was $0.45 versus $0.54 in second quarter of 2011. A few key points about our balance sheet. CapEx for the quarter was $8 million versus $9 million in the second quarter of 2011. We still expect our CapEx will total approximately $40 million this year due to our investment in facility consolidations and improvement and our investments in implementing SAP across the company. Net debt was $530 million. During the quarter, we closed an add-on offering of $50 million of our 8.25% senior subordinated notes maturing in March 2018, which increased about $450 million. The proceeds from the offering were used to pay a portion of the outstanding balance under our senior credit facility. Our quarter ending leverage, total leverage ratios was 5.5x, higher than year end and our targeted range of 2.5x to 4x. Keep in mind that seasonally our borrowing is peaked during our second quarter as we build inventory for the spring garden season then come down significantly as we approach fiscal year end. We did not purchase any stock under our outstanding share authorization buyback plan in the second quarter. At March 24, 2012, approximately $52 million remained available under our authorized share repurchase program for future share repurchases. One more data point I wanted to share with you is the amount we've expended related to our transformational initiative. In our year-end call, we talked about an expectation of $10 million we spent in 2012 on transformational activity. Year-to-date, we've spent about $4 million in our transformation, primarily in the second quarter. This includes the expenditures for facility consolidation and severance costs among others. So in summary, we believe the operational issues that affected both sales and marketing this quarter are temporary. And in fact, April was a solid month as we significantly reduce our order backlog. Our fiscal third quarter is historically an important one as our Garden control and our flea and tick products reach peak seasonal demand. Thank you for joining us this afternoon. Now Bill, Gus and I would like to take your questions. Amy, would you please open the call for Q&A?

[Operator Instructions] And our first question comes from Joe Altobello at Oppenheimer.

Just a couple of quick ones. I guess, first, is there any way to quantify how much the execution issues in the quarter cost you in terms of sales?

To quantify completely, no, because they're -- I mean just to sort of give you an idea, we can talk about what was cut or short, if you will, but a lot of times those were shipped even a day or a week late. We have tried to quantify, but since it's a moving target, we've not been able to completely quantify it. The only thing that I will tell you is what we repeated quite often is that mostly the orders were shipped in April. So many of the orders were shipped in April. There was an impact in terms of how much it affected us, but it's hard to quantify, and this is not something that we're trying to dodge. We want to give you a right answer, but because of the give and take and the changing of the priorities and moving towards the customers' needs and when exactly they were ordered and if they were short one-time or they reordered a week later, a day later or 2 weeks later, all those things were like moving targets, so it's kind of hard. The only thing that I can say is that we did increase -- since we shipped the orders in April, that number was increased substantially over a year ago.

Okay. I appreciate that, but I guess another question to follow up on that was, what was April sales up year-over-year?

So from a standpoint of April, again, April is part of a larger quarter. Without speaking directly to the overall, and we can talk about a couple of the color points in that month. So frankly, we talked about flea and tick. We've seen a multiple on that number. It's very, very -- coming very strong in the month of April. So we'll wait and see how the rest of the quarter shakes out.

Okay. In terms of the delay in shipments, I mean, it sounds like it didn't result in any market share losses, is that fair to say?

There is -- I don't think so. We don't have actual data in terms of market share with many of our customers. We only have in certain particular areas because of their reporting responsibilities. So as far as we can see overall, we've had -- if we've had any kind of market loss, it was very, very minimal in terms of what we encountered. And how that plays out in April and beyond, I wouldn't be able to tell you right now whether or not that goes away and we actually increase in terms of what our market share is.

Okay, but just one last one. Obviously, you guys don't give guidance, but I mean last year you earned $0.50. Year-to-date, you're tracking, obviously, below that. You talked about the second half being better than the first. I mean, should we still expect this year to be better in terms of EPS on a full year basis?

No. We certainly expect our results in the back half of this year to be better than the first half, but we still need to invest as part of transformational activities. And so as this play out, we'll continue to invest, both in making the transformation happen as well as investing on our marketing and brand building activity. So we'll expect the back half to be improved while we continue to invest in the transformation.

Joe, FYI, it's important to note that we told you we were going to have a challenging first half and we were going to have a much better second half.

The next question comes from David Mann at Johnson Rice.

In terms of the products that were hit hardest, can you just elaborate specifically which categories had the biggest delays? Were there specific regions and customers also that were most affected because of this?

As we look at the Garden segment and it had an impact obviously on our bottom line, we had some issues in the controls area as we have early demands that we've talked about in the division -- facility consolidation were impacting the controls. This is a higher-margin area for us. But in addition to that, we saw some declines in both our bird feed and grass seed compared to the prior year. But as the way to think about the transformation, again, controls business was impacted.

And then in terms of any regional concentrations where that happened most or customers that were hit the hardest?

Well, interesting thing about the Garden season is that it rolls out across the country in different phases, right? So weather in the south, spring sometimes arrives earlier than does in the Pacific Northwest. So as far as how the Garden season rolls out, it's over time across the country. I don't have any specific geography data as it relates to the fluctuation.

And then just sort of following up on the last question or one of their questions about the amount of sales that you think you lost in the last quarter and the amount that you've recovered, thus far, in April, how did those 2 numbers reconcile?

I think it's kind of hard to tell because that would say a net kind of gain or year end. I think at that point, we will start to get into guidance, David. The only thing to truly say is that there -- the first time after the quarter ended, which is clearly April, we came out in very good shape. So I would be able to say right now whether or not it's mutual or we gain what we lost because there's still a lot moving through the system.

Right. Gus, in your background, you've been through these kinds of transformations more than a lot of investors perhaps in terms of executing them. When you go through this kind of hiccup, if you will, how do you get the organization to the place where you're able to manage through it, perhaps in a better way, either that doesn't happen again or that the impact is a lot less.

Well, here's the -- I mean, there's start out. I talked about stress points. And there hasn't been a transformation that I've been involved with that you don't get stress points, and they vary in both levels and intensity. And from my standpoint, even though it seems like quite a bit, it wasn't as bad as other situations that I've been part of. Here's the takeaway, is that the stress occurs where the weak points are in the system, if you will. So if you combine, and I'll give you just as an example, if you combine a facility that's operating -- and I'm going to give you examples as opposed to give you -- and then I'll go to the specifics. If you combine a facility that, say, operates at 35% and all of a sudden it needs to operate at 70%, if there's not very clear processes in place and it's more manually handled, there's a tendency for some of those issues to break down, whether it be from a forecast, whether it be from people, new people in the system, whether it's supply issues, vendor issues or anything else. So those are the stresses that we try to prevent. But there's no possible way that you're going to be able to take care of all of them. How you do it is exactly how it's been done. I have to tell you I am impressed with the organization, how hard they've worked and how much closer they are to resolving all these issues because they're nagging, they're exact, their IT system issues because in some cases we -- because of the early season, we had both facility rationalization and IT implementation at the same time. So it's just a matter of moving and muffling through these names and making sure that the processes are in place and are repeatable. Again, if you're moving through a facility and you have excess capacity, it allows you for a much easier movement through the facility without strong processes. Until those processes are fully implemented and fully accepted, you're still going to have some stress points. And that goes through, whether it's a facility, whether it's the forecasting process, whether it's the distribution or anything else. So it's just a matter of developing the processes and moving along very, very well. Like I said, the organization, with what we encountered, has come through in a very big way. While we're not out of the woods yet, I am very proud and very happy to say that these folks are moving very much in the right direction like other successful opportunities that I've been a part of. That's why I see it as a temporary issue.

Our next question comes from Reza Vahabzadeh at Barclays.

Can you just talk about inventory levels at retail again? Lori, I thought you alluded to it, but quite frankly, I couldn't hear exactly if inventory at retailers for your products are in reasonable shape or high, low.

Well, that was sort of the -- and that's a very good question because there's a perfect storm because most of our retailers and certain ones in particular made it a corporate decision that they will not -- they were going to go through their own transformation. One of our biggest vendor -- one of our biggest customers in Garden had committed to a huge census reduction and absolute monstrous inventory reduction. So when -- a lot of times where as we expected to be able to have what we call our sell-in or we provide them products way before they needed it, it became on a direct sale basis, meaning that as they need it, as they work down their inventory, they wanted things right away which further stressed the system. So while we're going through our transformation, many of our customers have either gone through or are going through transformation themselves. This particular customer had different individuals in supply chain, different individuals in marketing, merchandising and everything else. And it took huge, huge cost side of the system, and there were a lot of the institutional allowance that went away. So it created another strain for us.

And I assume that also exacerbated your shipments in the March quarter?

Yes.

Is that now completely dissipated?

The supply issues?

No. The retail or inventory changes issue.

No. They are in the process. They have committed to the street that they were going to reduce their inventory substantially. So this is going to be something that we're going to have to live with and manage in a much different manner than we -- what we have in the past because they're committing that they want to take their inventory down as well. And by the way, we were not the only ones that were affected by that.

Got it. So on the supply/fulfillment issue, I don't know if you can share how low your fulfillment rate got to and how well it's recovered here in your third quarter.

Unfortunately, we don't provide fulfill rates for our organization.

Okay. But is it back to normal now?

We would have to go product line by product line in order to give you that answer. Some, they're -- we're not affected at all and some of it were light -- as Lori mentioned, like the controls that was substantially affected. So there's almost a whole gradient of the different product line and how they were affected, again, depending on a lot of different factors.

And are you thinking that some of them are still lingering here in your third quarter?

I'm sorry?

These supply issues, are they still lingering for some key product lines? I think Lori mentioned, maybe Dog & Cat food?

Yes, they are lingering issues. Yes, again, we had sort of like the rat and the python, so to speak. It has to go through the system. But also, there's a lot of different customer requirements that we have to adhere to. So those are the items that we're addressing. The takeaway about this is it's not a debilitating issue. We've got it under control and we're moving in the right direction in order to achieve the fill rates that are acceptable to us and our customers.

Right. Just a financial question for the whole team maybe. Share buybacks, obviously, you have a -- you pulled back on share buybacks this quarter. Is that a temporary pullback? Or would you anticipate restarting that program at some point in the next -- in the rest of the year?

Reza, share buybacks is purely opportunistic. So we've talked before about our use of cash. Our first choice in the use of cash is investing in our operation, followed by acquisitions that would be additive and accretive to our organization and then buy back. And so we will obviously just take around that. So we have availability to buy shares back, but it's really by discretion.

Our next question comes from William Reuter, Bank of America Merrill Lynch.

Just one final question, and I apologize if we've been beating the dead horse here. But in terms of the challenges with ERP, I assume that those -- or that was of the challenges were about, one, do you know if you lost any customers because of this?

Let me start out with the first. There were a number of symptoms and ERP was a small component of those. It was not the cause. Again, going back to stress points. It's just different issues along the way. And as far -- and I was going to ask you the second question, unless you want to follow up on this one.

No. Sorry, you keep going. I apologize.

Okay. And as far as losing customers, look, at the end of the day, a customer -- somebody asked me were they understanding. No one is understanding. It affects their business. We try very hard not to do that. As of right now, we don't feel like we've lost any customers, but we have -- I've not had a day-to-day scenario that says this is going to happen, some orders may have been cancelled altogether, but we've not, to my knowledge, we have not lost any customers.

Okay, that's helpful. And then in terms of the raw materials, how are your raw materials in the third and fourth quarter as they flow through the system looking compared to the first and second quarters?

Yes. I think you're probably referring to, like, commodity cost?

Yes.

Yes. So let me put some color on the quarter. We talked about this in prior calls. As it relates to Q2 and our commodity cost, for instance around our bird feed area, we've talked in a number of previous earnings calls that, that commodity costs, they marched upward rather swiftly throughout 2011. But if we look at the second quarter of 2011 to the second quarter of 2012, if you looked at kind of the purchase price for those raw materials, they still are up over a year ago. In recent quarters, they sort of stabilized, but they've not come back down to, like, 2010 levels. They're still at elevated levels. As we look forward, we'll be working on our inventories. We'll see what new crops to come in and we'll be watching prices very carefully.

Okay. And then one last one. You noted that the results in the back half of the year are going to improve. Are those year-over-year improvements? Or were you speaking to sequentially kind of the second half of the year versus the first half?

I think the way we've said historically is we felt that the first half of this year would be challenged, and it was. And the second half we thought that it would improve. We continue to be very, very focused in investing in that transformation and the $30 million of run rate savings at the end of the calendar year. So we're very focused on making sure we deliver and improve in the second half.

The next question comes from Karru Martinson at Deutsche Bank.

Just a follow-up on that. Was that sequential improvement in the second half or year-over-year in the second half?

Sequential.

I'm sorry, what was that?

Sequential.

Sequential improvement, okay.

Is what we were saying. And the year-over-year is mute simply here. The way that we were phrasing it when we talked about it was it was sequential. But we did not -- we were very mute on the -- on whether or not it was going to be year-over-year improvement.

Okay. I know you guys are more kind of geographically southeast concentrated. Did you see a benefit from the warm weather that we had kind of early in the season? Did that perhaps pull forward some sales, cause of those backlogs for you guys?

Well, I think if you heard us, we -- actually, the season started a lot earlier than what we expected because of the weather. And frankly, that was one of the reasons that we encountered some of the problems that we did. So we can say we benefited and we also -- some of our problems were based on that specific problem.

I guess to add to that, there are -- there were also different product lines. There are other product lines, such as bird feed that often times are impacted by warm weather where the consumer doesn't feel as compelled to protect -- perhaps buy as much bird feed in a warmer winter. So it kind of had different impacts on different product lines.

Okay. When we look at the lower grass seeds, I've been noticing a lot of competitive ads that directly feature your product. Have that -- does that have an impact in the quarter? Or what do you feel was kind of the driver of the decline in the grass seed sales?

So make sure I heard your questions. So your question is there's been a lot of competitive ads on grass seed and did it have any impact on the quarter. We've also been investing in our advertising and we're focused on making sure the consumer knows the benefits of the products that -- for Central Garden & Pet.

So then perhaps get a little bit more color why you feel grass seed was a bit softer this quarter than last year.

Part of that was the impact of the weather as well. Again, the mild winter results in less grass damage. And so, oftentimes, the weather will have an impact on how the grass seed sales go into spring as well.

And just in terms of that warmer weather for the winter, I mean, a number of others have said that, that should provide a lift for control sales in the second half. Is that kind of what you guys are seeing here?

We hope, yes. We hope that this continues.

Our next question comes from Carla Casella at JPMorgan.

This is Paul Simenauer on for Carla Casella. Just have a couple of questions. I think you answered a number that we actually had already. First, you have a target level of availability you want to maintain on your revolver?

I didn't hear the question, so you're asking about our revolver?

Correct. Do you have a target level of availability that you're looking to maintain?

Yes, sure. So if you think about our business, about 2/3 of our Garden business happens in the second and third quarters. So as we build inventory for that Garden season, what happens is we draw down on that revolver, but as those sales become receivables and we collect on those receivables, we pay down that revolver. So we expect to be out of the revolver as we approach year end. So while it peaks as we go through the second quarter, we pay that off as dollars come in from the sales.

Okay, great. And I just want to follow that up with one other question. So did you guys do the $50 million bond add-on to maintain your availability under the RC by any chance?

Well, interest rates are very favorable, and not knowing what the future brings, the rates and terms are very favorable. So we took advantage of that and added on to our fixed-rate debt. But we used the proceeds to pay down the revolver. And that gives us availability should we decide to use that in the future. But it's really taking advantage of the advantageous terms and rates that are out there today.

Okay, great. And then finally, how is the pricing and promotional environment in Pet and in Garden? And are you seeing more aggressive promotions in any parts of the country?

Well, the Garden side clearly is -- it's seasons in different parts of the country, and it's a gradient. Starts in the south and it goes north in different parts. And as far as promotions on the Pet side, it's pretty much across the board and there's not been anything extraordinary. We're just supporting more of our products, especially our flea and tick products because we do have a better product out on the marketplace.

Our next question comes from Colleen Burns at Oppenheimer.

Sorry to beat a dead horse here on the supply chain issues, but I guess I just wanted to confirm, did you have any canceled orders as a result of these issues?

Yes. Yes, we did, but they're -- canceled orders could -- this is where I was trying to answer the question correctly. Any time there's an order that's canceled, on our books, it's booked as canceled. When there's a reorder, that's another event. So that's where the difficulty comes in, in order for us to figure out which ones have been canceled altogether versus which ones were canceled due to availability and then were reordered later on. That's why I was having a hard time trying to figure out what that net amount was.

Got you. Okay. And then just, were there discounts that you offered to customers as a result of this, as a result of these issues that might impact the third quarter for some of these late shipments?

We had in some cases, very few cases, we had some penalties if we missed the shipments. But there were no discounts per se. No. And they were not of the caliber. We really feel we should -- it should affect us first quarter substantially.

Okay. So the gross margin decline year-over-year, that was mostly mix then, just the mix of what was shipped in the quarter as opposed to there being discounts or anything related to that. Is that fair?

Right. Correct. And also there was some additional -- clearly, when the processes aren't embedded in the system, we had to use extraordinary -- a lot of overtime and what have you in order to ensure that we got the products out to our customers, so the growth margin will automatically begin and impacted from that.

And then, I guess, given all the disruption and the glitches that happened, I mean, given that you are still consolidating, I think, you said 2 or 3 facilities in the second half of this year and still doing a bunch of ERP consolidation, I mean, do you feel you've worked through most of these glitches so you won't see that to repeat as you go through this year and to next year?

We hope -- we feel we've gone through just about all the major issues. There's a lot -- there's cleanup to do. There's always cleanup to do. And we try to anticipate all of the stress points that may occur and we try to address them as fast before we get into them. But sometimes if those things occur, the glitches, if you will, then we have to address them very, very quickly. And that's when I said we have a team in place, which is this whole company, and they're addressing them very quickly and they're working very hard to ensure success.

[Operator Instructions] Our next question comes from Carter Dunlap at Dunlap Equity.

I have to preface it by saying I wasn't listening to seed ads a year ago, spring season, but I have been this season And here in the West Coast, I mean, there's been a fair number of, I guess, what I'd call sort of claim/counterclaim sort of ads. I think they've said -- you say that you have more, but it doesn't last as long. I was on the East Coast this weekend and I was hearing some of these Pennington ads talking about claims that Scotts was making and directing people to go to the smartseed.com website to sort of get educated. I mean, not knowing how you built the brand last year, I guess, my question is this seems a little bit of a tit-for-tat, did it start out this way? And how would you respond to -- is it a way to build the brand versus sort of, I don't know, I guess, I'm just asking to sling a lot of mud and spend a lot of money with a very big competitor. I mean, how do you see the brand building on that, shaping up this season?

I think the, Carter, the brand building was primarily just us saying sort of opening the curtain, if you will, and just saying this is what we're all about. And it's -- the claims were just that. This is what we offer, this is what we're trying to do. Where it goes from there with competition and everything else, obviously, we can't control. But we are, as the ad says, we are the grass seed people and the grass seed experts. And we suggest we direct our folks not only to look at the Smart Seed website, but also to go to YouTube and see the kind of testimonials and what people are seeing with our grass seed versus in the competition. So these were just sort of us making our way and developing an identity as to what we're all about. And I have to tell you, in my time here, I'm truly impressed with the commitment and the level of work that our organization is doing in order to make the best products. So it's just our way of explaining to the marketplace. I'm not responsible for anything after that. I think it's important that we get our message out.

Do you get any feedback or any sense that your major Garden retailers like it, dislike it, fair?

So far, based on progress we made last year and what we hope to do this year, I think they like it.

One last question vis-à-vis your comment last year. Was the sort of leading with the claims-based message part of last year? Or is that net new to this year?

We identified it last year and we found it this year.

The next question comes from Kevin Seagraves at Fort Washington Investment.

I just wanted to clarify. It sounded like from your comments in the beginning that you're kind of caught up from a pricing perspective on commodities, but then it sounded like, too, that you're saying commodities are still up year-over-year. So I was just trying to get a sense for in this quarter and then kind of get a sense for going forward, do you feel like your pricing, when it comes to seed and bird feed, is kind of caught up with the commodities even though they are up year-over-year? I just want to put all that together and get a sense for where we were there.

I think we've made progress. And again, I think different products, different product lines have different impacts from the commodities, for instance in the bird feed with milo, millet, sunflower. That's highly sensitive to commodity change and we worked throughout fiscal year '11 and into fiscal year '12 to try and catch up on kind of a lag effect on these cost increases to us and pass them on. Are we fully recovered? I think we're certainly better, but we continue to watch commodities going forward.

Some of the SKU reductions that you talked about, does that make the business -- does that move the needle in making the business less sensitive to the commodity movements going forward? Or was it so small, really doesn't have an impact right now?

Well, those are -- I don't know that they're necessarily tied together. We just have a plethora of SKUs that may not be profitable, and so we're evaluating both from a strategic standpoint and also from a record-keeping standpoint as to whether or not we need to have it. So we're looking at it from a profitability, on carrying cost, et cetera and the strategic value, either by itself or in conjunction with the rest of the products for a particular customer -- for any particular customer.

Okay. I thought I heard there were specific bird feed SKUs that were reduced, maybe I misheard that, so I was assuming that, that would be somewhat tied to the commodity impact.

These were specific. These were not necessarily -- they resulted in maybe a little bit into the SKU point. But this is how you do more as to whether or not they were profitable for us. So any product lines, I mean any SKUs that were unprofitable or any that we were dealing with any particular customer, there was -- that we couldn't raise our prices and they were not profitable for us, then we would be moving away from them.

The next question comes from Gerry Farber at Gerry Farber LLC.

Questions have been answered.

[Operator Instructions] And our next question comes from David Mann at Johnson Rice.

In terms of the earlier comment that the mix of the sales shortfall hurt you in Q2, should we assume that the recovery in April is mainly in the similar categories, therefore, that mix is helping you somewhat in Q3 margin?

That's a fair assumption.

Okay, great. In terms of what you're talking about, about new product performance, I know you talked about flea and tick. You had a number of new product introductions, were you generally pleased with them? Any other callouts you would make there?

Yes. The short answer is yes. And I think the teams have done a very good job both understanding consumer insights, customer needs, proper promotion, balanced approach in terms of how we go to market place and how the consumer will lift them off the shelf. So for the most part, we've been very happy. We love to have just more of them, but yes.

Great. And then, perhaps, a question for Bill. In terms of acquisitions, can you just give us a sense on how you -- what you're seeing in terms of the pipeline? Are there seemingly more opportunities? Is it the same? And does this kind of glitch that you sort of incurred this past quarter is sort of a sign of all the transformation and moving parts going on, does that change your willingness to do an acquisition while the organization is going through that kind of change?

Well, in terms of the environment out there, there's been a pickup in activity. And I would say, it's got to be a 20% to 30% lift in terms of businesses that are available. We continue to diligently work through and continued to have our extensive scouting activities and are constantly evaluating transactions. To your second question, we're awful careful about buying the right businesses and buying them at the right price. And when those situations come forth, we would move ahead and proceed. As Gus said, we think these issues operationally are transitory. And so I wouldn't expect that to have a specific impact. I think the actual businesses that are available on the pricing terms and conditions are much more of the driver.

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Zenker for any closing remarks.

Thank you for all your questions and for joining us on the call today, and have a nice day.

Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.